Report details AT&T wait to break even on iPhones
With its large subsidies to Apple, AT&T doesn't break even on iPhone accounts with high data-usage until the 17th month of a 24-month contract, according to a new report from Yankee Group.
The report, titled "The Golden Subsidy Egg's Goose is Cooked: Welcome to the Brave New Subsidy-Free World," looks at the downside of subsidies paid to manufacturers by cell phone carriers. The report cites AT&T's iPhone contract with Apple as a prime example.
Subsidies have typically helped mobile carriers offer customers free or low-cost devices in order to lure them into buying long-term service contracts. Smartphone owners are happy because they're getting the latest devices at rock-bottom prices. But the surge in data use and the rising cost of grabbing new customers are cutting profit margins for providers, says Yankee Group.
With the mid-2008 launch of the iPhone 3G, AT&T struck a subsidy deal with Apple that slashed the price to consumers to $199 for the low-end version but forced the carrier to bear the upfont costs of each unit. Several published reports have estimated that AT&T's subsidy is at least $300 per phone. (Neither AT&T nor Apple responded to requests for confirmation.)
At the time, AT&T acknowledged that the new deal would impact profit margins and dilute earnings. The company's second-quarter results did show a dip in both revenue and earnings.
AT&T went along with the subsidy because it felt that lower iPhone prices would bring in more customers. But in a catch-22, more customers have also put a strain on the carrier's network, both for voice and data. Ralph de la Vega, CEO of AT&T Mobility and Consumer Markets, said in August that AT&T's wireless data usage jumped almost 5,000 percent from 2006 to 2009.
That strain has made for some unhappy iPhone users and has forced AT&T to scramble in order to beef up its wireless infrastructure.
Removing the subsidy for AT&T would win the company a total return of 33 percent over a two-year contract and reduce the break-even point to eight months, Yankee Group said.
Moreover, unless mobile carriers in general can cut their reliance on subsidies, Yankee Group noted, they may see profit margins fall even further.
"Until now, North American operators have been kings of the devices market, controlling distribution and bearing many of the risks," Andy Castonguay, Yankee Group director and author of the report, said Thursday in a statement. "Rising customer acquisition costs, exclusivity fees and flat-rate pricing are squeezing margins for coveted smartphone users. To reverse this trend, operators must spread the control and risks across OEMs and retailers to offer more affordable options and establish greater levels of clarity and trust with consumers."
Below is a graphic from Yankee Group's report:
Lance Whitney wears a few different technology hats--journalist, Web developer, and software trainer. He's a contributing editor for Microsoft TechNet Magazine and writes for other computer publications and Web sites. You can follow Lance on Twitter at @lancewhit. Lance is a member of the CNET Blog Network, and he is not an employee of CNET. 
"Removing the subsidy for AT&T would win the company a total return of 33 percent over a two-year contract and reduce the break-even point to eight months, Yankee Group said."
and then the customer would....HAVE A CHOICE?!?!?!
us cellular, cricket, trackfone, and several other carriers are GSM. in the st louis area we have at least ten GSM providers.
Dude, you're wrong. US Cellular and Cricket are both CDMA, not GSM.
dont ask me why i was thinking that those two were GSM, but you are correct, USC and Cricket are CDMA. however, there are still MANY GSM carriers that could benefit from fewer subsidizes handsets.
"Removing the subsidy for AT&T would win the company a total return of 33 percent over a two-year contract and reduce the break-even point to eight months, Yankee Group said."
yeah, but then the customer would choose what carrier they want the phone with. also then other carriers could subsidize the cost of the phone and a create a competitive market.
and doesnt a 64gb touch cost $400? Ouch. and thats just an MP3 Player.
i dont think subsidies are good for the consumer unless all the carriers can offer the subsidy for the same product.
No wonder the Verizon network is roubust, very few of their customers can use it for anything but voice.
There was nothing in the article that gave any evidence to base this conclusion on. Today AT&T Chief Technology Officer John Donovan stated at the CTIA Fall 2009 trade show today that: "We have seen unprecedented growth on our network in the past couple of years," he said during an interview on the sidelines of the conference. "And the iPhone has certainly played a role. But it's not the only device driving growth. We have a lot of people going from basic feature phones to quick-messaging devices and other smartphones, which is driving data usage."
Can't wait for it to happen.
if there is anything you should realize about apple users is that they will pay anything for any of their devices.
and if at$t ended their subsidy, it would end the exclusivity of the iphone and open it up to other companies and new users.
but its the last thing that would "kill" apple's stock price.
When someone credible and unbiased comes out and says it, I'll trust it.
Apple is charging ATT something in the neighborhood of $400-450 per phone would be my guess, if you look at the cost of an iTouch which lacks MANY of the components of an iPhone. The cost of activating, delivering, supporting, etc. the phone likely comes in at another $100-200 per customer. I can't know how to quantify the data costs, but I would guess that ATT is only making money on the final 6-8 months of the contract. And they make something on the order of $20-$50 dollars off of people who terminate early and pay the pro-rated termination fee. Not much at all, really.
iTouch? Are you talking about the product from LGMedSupply?
http://www.lgmedsupply.com/lgnprteun.html
The Yankee Group has a lot of companies it has done research and reports for including Microsoft as you noted, *and* Apple, AT&T, Verizon, etc.
Does this mean that it's biased? Who knows- Microsoft doesn't benefit from any of it, so perhaps Verizon or some other company paid for the report to be done. The Yankee Group isn't saying, that's for sure.
It's simple logic that anyone can see.
As soon as my contract is up, I'm outta there. Still pissed I fell for the "get an iPhone" craze. I do LOVE the phone though. ;)
So, is AT&T using this as a propaganda piece to try and convince everyone it costs them more money if people use more data?
If everyone, at the same time, started using lots more data... sure there would be a cost. But it isn't like there is a direct relationship. Once the network is in place at a given capacity X, it doesn't cost them more money until X is overrun and they have to expand.
It would be like me with my 100 mb router telling a friend I really couldn't add her to my home network, because there is a cost involved... as I might have to upgrade to 1 gb router once the pipes totally fill up.
That fact that they are claiming the iPhones have pushed their networks past capacity, shows how cr**py their networks are. Sorry AT&T... you should have been putting some of your profits over the years into the technology rather than your pockets.
I always think it's funny to hear companies talk about 'cutting profit margins'. If you're making a profit, you're doing well. Investors are going to have to realize that the fairy-land of making 50% more profit this year than the last is OVER! That's what has gotten this country into the mess it is now in.
Right now, you're simply r*ping the top few percent of the market, and spending tons on marketing..... rather than actually doing what you are supposed to be good at doing... your core business. Spend some of that money actually putting the technology in place to do your business, rather than figuring out how to extract the maximum money from the few customers you have... without having to expand your business.
While only T-Mobile and AT&T operate on the GSM frequency in the U.S., Verizon and possibly Sprint will eventually be moving to LTE along with T-Mobile and AT&T. This will allow customers much greater flexibility to move to a different provider, as their phones will work on most, if not all, major U.S. cellular networks.
Another article written by someone who believes Apple receives the same return (per unit) from At&t as it does from direct to consumer sales.
Plain & Simple:
- If Apple receives $600 per unit when purchased without a contract by consumer.
then
- Apple receives $600 - (negotiated price cut between Apple and At&t) per unit when sold with contract.
Another article written by someone who believes Apple receives the same return (per unit) from At&t as it does from direct to consumer sales.
Plain & Simple:
- If Apple receives $600 per unit when purchased without a contract by consumer.
then
- Apple receives $600 - (negotiated price cut between Apple and At&t) per unit when sold with contract.
Another article written by someone who believes Apple receives the same return (per unit) from At&t as it does from direct to consumer sales.
Plain & Simple:
- If Apple receives $600 per unit when purchased without a contract by consumer.
then
- Apple receives $600 - (negotiated price cut between Apple and At&t) per unit when sold with contract.
well, i switched to t mobile, and feel happy to use mytouch. its worth the money paid for w data plan.
wonder why at&t still sucks despite high profit margins. they really don't care to provide value services at an economical price to the customers. they are here to rip-off customers as much as they can.
Economies of scale have kicked in which could allow Apple to abandon the subsidy or to allow users their choice -- $199 subsidized or $599 unlocked.
No one was crying when the iPhone 3G was released because all the early adopters were able to get the subsidized price on the new model because they didn't get one on their original iPhone. This past July you must remember all the whiners who thought they were "betrayed" when they found out they would have to pay full price because they had already gotten a discount on their iPhone 3G and would have to wait until their contract was up.
- by CreativeMalcolm October 9, 2009 1:11 PM PDT
- What the carriers should do is move toward a model where they pay the company who makes the phone for as long as the phone is in use. So for example, Apple could sell all their iPhones for just a lil above cost, say 300ish or something like that, and then have a small subsidy on there for 100 bucks or something, and then have them get paid additionally for every month that that customer keeps using their phone. Lower the subsidies offered on new hardware, IE get rid of the 0 dollar phone, and then have part of that customer's monthly bill always go to the OEM.
- Like this Reply to this comment
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Showing 1 of 2 pages (54 Comments)That way LG would go bankrupt when all their phones break after 6 months, Nokia and Samsung would be rolling in cash from all the old people who buy their phones and keep them for forever cause they never break. And when an iPhone keeps lasting forever, and I get the new one, but give my old one to my mom, then Sony Ericsson stops getting paid her subsidy and the money starts going to Apple. I think it'd be a great solution, it'd force OEMs like LG and Motorola to actually make sure their phones work well instead of just looking good. It would also help shake people from this assumption that phones are way cheaper than they are.
Of course this'll never happen. But it's a far better model.